Tobacco on the loose

Other tobacco products (that is, everything other than tailor-made cigarettes), make up less than 20% of category sales. But, margins are higher and smokers' habits are changing. You may need to change your tobacco category mix to match.

This is a story about other tobacco products (OTP), 'other' meaning other than tailor-made cigarettes (TMC). OTP comprise cigars, roll-your-own (RYO) tobacco, RYO filters and papers, and pipe tobacco. To understand what is driving these segments of the tobacco category in convenience you need to understand a little bit about different types of smokers - they are, after all, your customers.

Important trends

Though estimates vary for the proportion of the tobacco market that is made up of RYO tobacco - between 5% and 10% - it is safe to say it is significant. Moreover, although not as dramatic since the step up in sales in 2003 when a number of TMC smokers shifted to RYO, the market is still growing.

"We think RYO will continue to grow as value-conscious adult smokers seek a more cost-effective smoking choice," said Colin Lippiatt, Manager Communications, Philip Morris.

John Galligan, Director, British American Tobacco Australasia (BATA), agreed that prices are changing peoples smoking decisions, adding that "consumers are looking for a cheaper way to smoke as prices continue to rise with excise adjustments".

According to Mr Galligan, the RYO tobacco consumer is typically an adult (over 30) male, from the lower socio-economic demographic and therefore price conscious, but also down to earth and highly individual. According to Kathy Barker, Trade Marketing Manager Smoking Accessories, Swedish Match, a significant part of the market are university students.

"Consumers say they can make about twice as many cigarettes for the same price with RYO tobacco," said Ms Barker.

"Even price-conscious RYO smokers want slimmer filters to get more cigarettes from the pack. We have seen consumers move from regular to slim to ultra-slim to 'micro-slim'."

Also of significance is the growing consumer preference for 'bright' tobacco. This explains the success of Champion and Winfield variants which make up four of the top five in the major franchised C-Stores. In fact, the top four brands (Winfield, Drum, Champion and White Ox) make up 86.2% of the total category contribution.

"When smokers move from TMC to RYO, they are looking for something with a familiar taste," said Andrew Matheson, National Business Manager, Imperial Tobacco Australia.

About half of RYO smokers also regularly smoke TMC, so familiarity means Virginia-style tobaccos. This preference has adversely affected sales of the 'dark' tobacco brands such as Drum and White Ox, but these are still important brands.

"Once in the RYO segment, smokers will try something new, even White Ox which is the strongest," added Andrew Matheson. "With only two SKUs, White Ox still has 10% share of the RYO market."

The other shift in the RYO segment is between pack sizes. Whereas about 65% of sales are 50 gram pouches, the 30 gram pouch is increasing share particularly when price is an issue. The retail prices (around $25 for a 50 gram pouch compared with $15 for the 30 gram) straddle the critical $20 price point.

Although it is fairly obvious that sales of papers and filters trend with RYO tobacco, there has been stronger growth in sales of filters. There are also regional differences. For example, Tally Ho and Ventti are the main brands in the papers market in most States but, in Western Australia, Rizla is the most popular brand.

Cigar smokers tend to smoke only cigars even if they have been cigarette smokers in the past. They constitute a different type of consumer, smoking mainly as a social activity or occasionally.

At around 5% annual growth in sales, the cigar segment is still the fastest growing part of the tobacco category. This growth is from a very small base so that cigars account for only 2% of total tobacco category sales. That being said, they offer the highest retail margin.

Most of the growth is in packs of small cigars - sometimes referred to as 'cigarillos' - in particular the Captain Black range, although sales of Wee Willem and Caf? Cr?me variants have also grown.

Swedish Match, Stuart Alexander and BATA share the cigar market in the channel. The top five brands (Willem II, Henri Wintermans, Captain Black, Old Port and Schimmelpennick) represent 90% of the total cigar market.

The national market shares hide important State differences. Henri Wintermans is dominant in NSW; Willem II in Victoria and Western Australia. Captain Black is popular in South Australia where Old Port (dipped in wine!) is number one.

The popularity of small cigars has meant a decline in sales of medium and large cigars in the convenience and route channel, although regular smokers of small cigars will trade up to a medium cigar for special occasions.

Like the trend towards RYO, price is a factor. However, other factors are also driving the small, dry cigar segment and these factors are related to the social aspects of smoking.

"Growth in the sales of small cigars is due to time-poor customers wanting something quicker to smoke," said Paul Hindmarch, Trade Marketing Manager, Swedish Match.

"That also means they smoke more of them."

Balancing this tendency are the tightening restrictions on where consumers can smoke. For example, all indoor smoking will be banned in Victoria in 2007. If smokers are eventually forced to smoke at home, they may prefer premium cigars and the convenience of local stores.

In the meantime, social acceptability of cigar smoking is affected by the smell. Aromatic tobacco, once the preserve of pipe smokers, is being blended into cigars to create a sweeter taste and aroma.

"The biggest trend in cigars is towards aromatic tobaccos," said John Rose, Director, Cigars Esplendido. "They were introduced in the United States about 10 years ago and are now a large proportion of total sales. They were introduced here four years ago and have slowly gathered momentum. Now they are taking off.

"Similarly, flavoured cigars have been around for about three years and are now increasingly popular."

"The aromatic cigars market is growing and they are becoming more popular with females," added Theo Chronopoulos, Trade Marketing Manager Mass Market Cigars, Swedish Match.

However, we are not likely to see women showing the same interest in pipe smoking. The market for pipe tobacco is slowly declining, and pipe smokers prefer to buy regularly from the same retailer for consistent quality. Turnover in the channel is slow and pipe tobacco tends not to offer a good return for space. That being said, if you have loyal customers, by keeping fresh stock of their preferred packs they are likely to buy other products in your store.

Ranging is critical to success

That goes for all tobacco customers, so selecting the right range for your store is critical to success in the category and in your store overall. Although new products are less common these days, there are still innovations in the category.

As recently as October 2005, Philip Morris launched Peter Jackson and Longbeach RYO tobacco in 30 gram and 50 gram pouches.

"These brands are two proven sellers, two names that adult smokers already know and trust," said Colin Lippiatt.

"Both the Peter Jackson and Longbeach RYO products are made from quality hand-stripped, stem-free tobacco. They are not designed to mimic tailor-made cigarettes, but are provided as an option for those adult smokers who choose to smoke a RYO product."

Imperial Tobacco focussed its innovation in 2005 on the packaging with a new durable plastic pouch for the Drum range.

"We based the new pouch on research into customer needs," said Andrew Matheson. "We found out that the sticky tape the held the cover down gets tobacco stuck to it and that customers wanted somewhere to keep their papers. The new pack uses a Velcro tab and has a place for papers."

"Range should reflect margin and turnover," says Ross Barrett, Trade Marketing Manager, Stuart Alexander.

In an average four-bay unit, some cigar, RYO, and even accessory SKUs outsell some packs of cigarettes. Margins are highest on accessories, up to 60%.

"The margins are better on cigars than on cigarettes, particularly medium cigars and turnover depends on your customer base of smokers," added Ross Barrett.

"Though 98% of cigar sales by volume is mass market cigars, the best range depends on store location," said Theo Chronopoulos. "Retailers need to cater for impulse customers looking for a larger cigar, such as Willem Corona or La Paz in a tube for special occasions, as well as the small cigars."

New products reflect the trends, with new aromatic and flavoured variants appearing. Swedish Match already supplies Alternativos in vanilla and cherry, and is introducing an aromatic variant of Wee Willem. BATA recently introduced a cherry-flavoured Captain Black variant.

"You may need to use a couple of suppliers to get the optimum range," added Paul Hindmarch.

"Cigars Esplendido are Australia's exclusive agents for Panter Cigarillos, Agio Filter Tip and Half Coronas and the Balmoral Dominican ranges of cigars. These brands have been successfully distributed throughout specialist markets and include new vanilla and coffee/chocolate aromatic variants within the Panter as well as a sweet tipped cigarillo. Due to demand, the Panter and Agio ranges are now increasingly a part of mainstream ranging due to competitive pricing and heightened distribution".

"We have negotiated reduced prices with manufacturers and can now offer cigars at a price competitive with Wee Willem and Caf? Cr?me," said John Rose.

"Our new electronic ordering system means you can order over the internet for next day delivery in most locations. Delivery is free for orders over $200."

Now is the time to review the category and to make sure all the sub-segments - cigarettes, cigars, RYO and accessories are covered.

"Review before Christmas to be ready for the busy holiday period," said Kathy Barker.

"Regional stores, in particular, need to review their range to suit the higher number of travellers and holiday-makers visiting their store."

New QLD display regulations

While you were coming to grips with new product names, the new display regulations in Queensland took effect in October. With only one square metre of display space for tobacco products - cigarettes, cigars, RYO tobacco and papers - retailers in that State will need to make every square centimetre count. Although that means displaying the top-selling cigarette SKUs, it is important that you do not neglect the other sub-segments of cigars and RYO products. Even if you do not display everything you stock you can still let customers know what is available.

For premium cigars and dry cigars that sell less quickly, Swedish Match has created a frosted humidor with a black and white sheet listing the contents. When asked you can open the back and show the customer what is inside.

"We expect the strong brands to get stronger and the weak brands to get weaker," said Theo Chronopoulos.

"The top brands will dominate petrol and convenience."